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China's economic policy uncertainty and US variance risk premium: A flight-to-safety analysis

Author

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  • Ooi, Kok-Hwa
  • Hooy, Chee-Wooi

Abstract

This study examines China’s Economic Policy Uncertainty (EPU) and the US Variance Risk Premium (VRP) using monthly data from January 1995 to November 2023. To address cross-border uncertainty transmission, we develop an asset-pricing model that incorporates foreign-policy uncertainty into the US stochastic discount factor, yielding testable predictions about a “flight-to-safety” mechanism. Empirically, while China’s EPU shows no full-sample impact on US VRP, a significant negative relationship emerges under normal market conditions, confirming that heightened Chinese uncertainty drives investors toward US safe assets, compressing the VRP. We rigorously address crisis-period sensitivity, demonstrating regime-dependent risk transmission. Additionally, we provide direct evidence for the capital flow channel: Chinese EPU significantly impacts US Treasury yields and portfolio flows. This paper contributes to international finance literature by formalizing cross-border uncertainty spillovers and detailing the underlying investment mechanisms.

Suggested Citation

  • Ooi, Kok-Hwa & Hooy, Chee-Wooi, 2026. "China's economic policy uncertainty and US variance risk premium: A flight-to-safety analysis," Finance Research Letters, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:finlet:v:104:y:2026:i:c:s1544612326006860
    DOI: 10.1016/j.frl.2026.110158
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F30 - International Economics - - International Finance - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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